Page 47 - FINAL CFA SLIDES DECEMBER 2018 DAY 6

LOS 20.j: Explain the effects of exchange Session Unit 5:
rates on countries’ international trade and 20. Currency Exchange Rates
capital flows., p.165-166

Focuses on how exchange rate changes affect total expenditures on
Elasticities Approach
X/Ms, which depends on the elasticity of demand for X/Ms

Per the Marshall-Lerner condition:

This reduces to : εX + εM > 1

Because M and X contracts require delivery and payment
in the future, M and X quantities may be relatively

insensitive to currency depreciation in the short run.

This short-term increase in the deficit followed by a

decrease when the Marshall-Lerner condition is met is

referred to as the J-curve!